Harvard Business School Professor Rawi Abdelal set out to discover how financial orthodoxy shifted over the last century from absolute faith in free movement of capital to capital controls in the middle of the century, and then back to an almost religious belief in liberalisation.
In his book Capital Rules: The Construction of Global Finance, Abdelal writes that the US has generally preferred an ad-hoc bilateral approach, against the European preference for writing capital market opening into the articles of the IMF. The purported US Treasury-Wall Street-IMF conspiracy to foist liberalisation on the developing world by rewriting the rules of the international financial system is not found in the archival evidence.
The US Treasury has for a long time effectively governed global finance, and US banks and financial firms are more interested in getting access to a handful of emerging markets, and don't generally need international organisations to make that happen.
Professor Abdelal argues that the recent phase of financial liberalisation reached its zenith in the autumn of 1998, prior to the Asian financial crisis. He says: "The autumn of 1998 was as close as the world has ever come to a consensus - written and unwritten - that capital's right to freedom applied everywhere and always. That consensus has since been shattered, and I cannot see how it could be reconstructed in the near future."
The rise of China and India has tended to favour their cautious approach of gradual liberalisation in developing markets, with the crisis of 1998 providing a negative example of the excesses of unregulated financial liberalisation. In the current period, growing current account imbalances could yet create a new crisis of legitimacy for the free movement of capital, leading to a turning inwards as occurred after the Wall St Crash of 1929, warns Abdelal.
Capital Rules: The Construction of Global Finance
Prof Rawi Abdelal
HBS Working Knowledge Aug 21 2006-08-22
Review by Joe Gill